New Delhi, Feb. 2: The Centre today restored the interest rate on Employees Provident Fund (EPF) to 9.5 per cent with retrospective effect from 2002-03.

The decision was taken at a meeting chaired by Prime Minister Manmohan Singh. The official notification is scheduled to be issued tomorrow.

The government finally conceded the Left's very vocal demand for restoration of the EPF rate.

However, the timing of the decision raised some eyebrows. It appeared to be an attempt to mollify the Left for overriding its objections to the increase in the foreign investment limit in the telecom sector to 74 per cent.

The hike in the EPF payout rate by 1 percentage point will benefit over 40 million subscribers across the country. The EPF rate will be calculated at 9.5 per cent for 2004-05

The Employees Provident Fund covers over 3.93 lakh establishments and has a corpus of about Rs 100,000 crore.

The Left has been clamouring for the restoration of the EPF rate to 9.5 per cent ' a demand that was stoutly resisted by finance minister P. Chidambaram who maintained that the government didn't have means to pay the higher rate.

The government's decision is expected to push up the deficit on earnings from EPF investments to Rs 900 crore.

Chidambaram told reporters after the meeting that the EPF board had earlier announced an interim interest rate of 8.5 per cent for the current financial year.

He said the EPF rate was under review for quite some time. For 2002-03, the central board of trustees of the Employees Provident Fund Organisation and the ministry of labour had announced 9.5 per cent. For 2003-04, the EPF rate was pegged at 9 per cent to which a jubilee bonus of 0.5 per cent was added, making it 9.5 per cent.

He said for 2004-05, there was a demand that the EPF rate be retained at 9.5 per cent. Pending a decision, an interim rate of 8.5 per cent was fixed.

'The Prime Minister has considered the matter carefully and decided that for 2002-03, 2003-04 and 2004-05, the EPF interest will be 9.5 per cent,' the finance minister said.

It was decided to set the EPF rate of 9.5 per cent for all three years in order to comply with a technicality.

Just last week, the government permitted non-government provident and pension funds to invest up to 5 per cent of their corpus in the stock markets and another 10 per cent in corporate debt.

The move will come into effect from April and is expected to provide a huge fillip to the domestic stock markets.

The decision to allow investment in the stock markets is designed to ease the pressure on the government, which is being forced to pay an 8 per cent interest on the special deposit scheme (SDS) in which 80 per cent of the PF corpus is parked. The finance ministry has been keen to cut the SDS rate of interest but it will be difficult to do that now.

One will have to wait to see whether the central board of trustees will pass an enabling provision to allow the EPFO to funnel 5 per cent of its corpus into the stock markets.

There is now a 1.5 percentage point gap between what the deposits earn in the SDS account and what the EPFO will have to fork out. If it decides not to take the risky route to the stock markets, the EPFO will be forced to dip some more into its surplus reserves to make the payout.